EGL23500 - Generation receipts: volume balancing functions within a group undertaking

EGL liabilities are calculated for a generating undertaking as a whole, and where the undertaking is a group, relevant transactions of all group members are to be taken into account when identifying the undertaking’s generation receipts. In this exercise the undertaking must use a fair and reasonable approach to identify the amount of the group’s generation receipts. See EGL23400 where a group undertakes trading activity on the wholesale electricity market.

Where an undertaking includes a supply business, a group may act to centrally balance or “optimise” volume on behalf of its supply business, such that generated and externally purchased volume is matched efficiently with the volume required to fulfil supply contracts. This may sit as a distinct and separate trading activity within a supply business, or it can trade within a separate trading company that provides the service to the group. This part of a group’s business is referred to as BalanceCo in the guidance below.

BalanceCo will enter into contracts with generators and supply businesses, to ensure the supply business has the requisite energy contracts to supply the profile of volumes the supply business has contracted with its various customers. Where a generating undertaking includes both generation and the supply, BalanceCo will purchase the volumes required for owned and third-party suppliers from within the business (owned generation) and with external third parties.

The key principle in calculating generation receipts when computing an undertaking’s liability to EGL is to identify those receipts that are attributable to the generation of the group, FA23/S282 & 283. Where a generating undertaking includes both generation and other businesses, it is necessary to determine the generation receipts that are fairly and reasonably attributable to the group’s generation and exclude any element of the overall receipts that are attributable to the supply business and other non-generation business.

Where the receipts received by the generator from BalanceCo are under a contract that reflects market pricing at the time of those transactions (and the volumes that could reasonably be transacted in the wholesale market at that time), receipts attributed to the generation volume should reflect an arm’s length price for wholesale power passed onto the other business. This treatment will be appropriate where BalanceCo is not taking any significant market exposure, i.e.: where it is the generator that is taking out trades with BalanceCo taking into account the generator’s own hedging strategy.

Where the receipts of BalanceCo can fairly and reasonably be attributed to generation, such as where the generating undertaking does not include a supply business but still uses a central function to engage in market trading activity for the volumes arising from its generation activities, those receipts will be generation receipts for the purposes of calculating the EGL. Where a significant proportion of generation flows through to the wholesale market, it may be necessary to apportion the receipts that arise to BalanceCo.

Where BalanceCo operates as an independent trading business within the undertaking, and this is unconnected to activities intended to manage or create value for the generation business, it may not be reasonable to include the receipts of such activity as generation receipts for the EGL.

The situations described above reflect what may be opposite ends of a spectrum and the functions undertaken by what is described as BalanceCo may vary. Groups that have such a volume balancing function may wish to engage with their HMRC compliance managers to agree what is an acceptable approach based on their particular arrangements.